OPIS Blog

Jet Fuel Cost Analysis for 2020

Strong demand and production remained trends for U.S. jet fuel prices in 2019, but as the calendar rolls to 2020, all eyes are on new IMO specifications, climate change initiatives and shifting fuel slates.

Read about where jet fuel prices started 2020 and where they are heading….

NOTE: Since the original publication of this blog, the new coronavirus sweeping China has curtailed air travel, as a slew of airlines halted flights, forcing refiners to cut runs and tweak yields to prevent a jet fuel glut amid a shrinking export market, industry sources said.

Estimates for the drop in jet fuel demand -- the transportation fuel to bear the brunt of the virus outbreak that has led to the lockdown of over 40 million people in China -- range from 300,000 barrels a day (b/d) to 400,000 b/d during the peak of the epidemic based on the 2003 SARS outbreak, they said.

How Much More Is Jet Fuel Per Gallon at the Start of the Year?

Looking at prices, jet fuel cash values across all U.S. markets wrapped up 2019 much more expensive than where they finished 2018.

Chicago saw the biggest yearly jump, with cash prices in that market soaring by more than 20%, as both differentials and futures were stronger than they were at the end of 2018.

Elsewhere, Group 3, New York Harbor and Gulf Coast cash values ended 2019 around 20cts/gal stronger than 2018.

Jet fuel was the picture of volatility on the West Coast in 2019. Los Angeles jet fuel prices soared by more than 15% on the year.

Listen to a Jet Fuel Pricing 101 Podcast:

Jet Fuel Cost Forecasts from Financial Analysts

Bank of America Merrill Lynch continues to be very bullish on distillates in 2020 and believes that jet fuel will ride the coattails of the "near record" ICE gasoil cracks that it thinks are in store for the first half of the year.

Even though jet fuel cracks slipped toward the end of 2019, and the market has yet to fully embrace a boost in middle distillate consumption, the bank sees a "massive surge" in distillate consumption tied to the IMO needs.

Remember: New IMO 2020 specifications will require a 0.50% global sulfur cap for marine fuels. That means ships will have to use marine fuels with a sulfur content of no more than 0.50%, which compares to the prior limit of 3.50%. The bottom line could mean great consumption of diesel fuel, which could impact production yields for jet fuel.

Analysts said that global air passenger traffic has increased at a 4% clip in 2019, but some of that consumer growth was offset by a similar percentage drop in air freight.

Bank of America Merrill Lynch analysts also believe that airline hedging has been in decline, with European carriers underhedged compared to recent history, while Asian airlines have room to ramp up hedges over the coming few months. Chinese airlines – which are a massive driver of consumption growth – appear to be unhedged for 2020.

What Does Hedging Mean? Listen and Learn:

Jet Fuel Supply and Demand Landscape

For petroleum refiners, jet fuel has been one of the fastest-growing products over the last four years in terms of percentage of growth, outpacing gasoline and diesel. That is likely to continue in 2020.

In July, the U.S. Energy Information Administration (EIA) reported U.S. jet fuel production hit 2.005 million b/d, the highest ever. For comparison, jet fuel production averaged about 1.80 million b/d in 2019, which is about on par with the year prior. However, production over the last two years is some 100,000 b/d ahead of 2017.

Not to be outdone by production, jet fuel demand also hit new records in 2019, according to EIA.

Jet fuel demand earlier in 2019 vaulted to 2.1 million b/d, which was one of the highest demand numbers ever reported by EIA. Implied jet fuel demand for 2019 averaged about 1.77 million b/d, around 1.70% stronger than 2018. Jet fuel demand left 2019 at around 1.95 million b/d, while it finished last year closer to 1.63 million b/d. For context, the five-year average demand for jet fuel is around 1.68 million b/d.

In terms of stocks, U.S. jet fuel inventories wrapped up 2019 at about 38.32 million bbl, which is a few hundred thousand barrels ahead of 2018's level. Still, supplies are running a deficit to the five-year average of approximately 560,000 bbl, despite the highest production levels. Inventories in every region are below the five-year average apart from PADD2 (Midwest), where stocks are about 133,000 bbl above it.

IMO 2020 Impact on Jet Fuel Costs

It is quite likely that the new IMO regulations will cause refiners to seek lower sulfur and lighter crude oils in order to process fuel to help get closer to meeting the new sulfur limits on marine and bunker fuels.

As a result, more clean products – including gasolines, jet fuel and other distillates – will get produced because the lighter the feedstock barrel, the more volume of cleaner product that gets produced. How refiners regulate their slates depends on price differentials between gasoline, diesel, jet fuel and other feedstocks.

Delta Air Lines Chief Financial Officer Paul Jacobson noted that the company's refinery in Trainer, Pa., would serve as a hedge against a potential surge in costs related to IMO 2020. Jacobson said the refinery focuses on high yields of diesel and jet fuel production and suggested that might cover 35% of any costs tied to the desulfurization of marine fuel.

Jacobson added that Delta is "well-positioned going into that (IMO). Certainly, we've seen a little bit of pressure on the futures curve, but it hasn't been near what the market had expected or at least thought in extreme cases that it would be."

PBF Energy Chairman and CEO Tom Nimbley also addressed IMO 2020 and he expects that distillate demand will increase with the changes, with shippers choosing initially to transition to the very-low-sulfur 0.1% ECA fuels. That bump from additional demand would then provide a floor under gasoline and jet fuel, as refiners adjust output accordingly.

Jet Fuel Costs and Climate Change Initiatives

Climate change will play a bigger role for airlines and for jet fuel in 2020 as the airlines progress with carbon neutral emissions growth over the next several years under International Civil Aviation Organization (ICAO) and Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) agreements.

New technology, including greater use of sustainable aviation fuel (SAF), airlines adopting more efficient aircraft in their operations and infrastructure improvements to modernize management systems will be part of what U.S. and international airlines continue to work toward to mitigate climate change.

IHS Markit, the parent company of OPIS, believes that the pressing need to meet climate change initiatives along with increased demand to fuel aircraft sets the stage for a radical energy transition.

"The transportation sector, where oil demand has become increasingly concentrated, is at the heart of this transition," IHS Markit believes.